During his MBA at Harvard Business School, Gaurav Singh developed a tennis coaching app that didn’t have much success with venture capitalists.
The app ultimately failed, and after graduating, he worked for a year and a half at an artificial intelligence startup in Toronto before exploring other avenues. He opted for an option that is becoming increasingly popular with top MBAs and entrepreneurs: launching his own research fund.
In February, Singh, 31, founded Guddi Growth. The Toronto-based search fund focuses on buying software-as-a-service companies with annual recurring revenue of at least $5 million.
Lower salary – but big pay potential
A search fund founder like Singh raises money from investors to buy and operate a private business, such as manufacturing, home improvement and transportation companies.
Investors invested $2.3 billion in research funds between 1986 and 2021, according to a 2022 report from the Stanford Graduate School of Business — a small share of the money that went to private equity firms. They generated about $9.8 billion for investors and $2.4 billion for entrepreneurs, according to Stanford.
And they’re becoming an increasingly popular career choice: Until 2013, fewer than 10 funds were launched per year on average, according to the Stanford report. But by 2020, 66 such funds had hit the market. A third of the “researchers,” as Stanford calls the fund’s founders, recently took a business school course on acquisition entrepreneurship.
In some ways, search funds are like a mini version of private equity: they target small businesses, often with a handful of employees who serve regional markets, and may own multiple companies. Investors generally supervise the researcher in his daily operations.
Singh said he has raised $600,000 from investors over the next two years – an amount he can spend at his discretion to pay for his salary, business travel and business expenses. That’s above the median of $425,000 per person collected in Stanford’s 2021 survey of researchers.
His fund is backed by a dozen investors, including specialist search fund investors and private equity firms he has introduced. He is in talks to buy two companies.
Exit strategies may include selling the reorganized business to a larger private equity firm, going public, or buying out the original investors and continuing to run the business.
For Singh, running a research fund means making less money in the short term than his HBS classmates who work in consulting or private equity.
“The reason you do this work is when you make a sale, you probably get $5 million at the end,” he said of the subsequent sale of one of his acquisitions .
Here are three reasons why he opted for a research fund:
Change in the search fund sector
Singh graduated from Harvard’s MBA program in 2022. Gaurav Singh
Search funds stereotypically select small Midwest HVAC companies, not technology companies.
“Historically, technology people have stayed away from research funds because they’re not interested in it,” he said. “In the last couple of years, people have started to like software in the search fund space because it makes a lot of money for everyone.”
There is a “tremendous opportunity” to find existing software companies that could benefit from a new or more efficient business model, he said. These could be projects converting on-premises software companies into cloud companies or projects turning one-time software purchases into annual subscriptions.
Generational transfer opportunities
Many small companies don’t have succession plans and could disappear if they aren’t acquired, giving search funds a good argument to buy them, Singh said.
“The baby boomers are retiring,” he said. “They’ve had profitable businesses with long-term, loyal customer bases, and those customer bases aren’t going away.”
Singh said he was particularly excited about companies that could benefit from the AI overhaul by automating sales and marketing or expanding the customer base without increasing the number of employees.
Driver’s seat
The research funds are also an opportunity for Singh to work for himself. If he had started in venture capital or physical education, he would not have gained as much practical expertise or immediate leadership experience.
“For me, it was the quickest way to get into the driver’s seat,” he said.
He can work anywhere in the world, giving him the opportunity to spend time with friends and family, including his granddaughter.
“As an entrepreneur, you work even harder, but how you work and where you work is totally different,” he said.
Singh said he knows of about 20 MBAs in his Harvard cohort who have started pursuing funding, out of about 800 in his class.
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